In Silicon Valley, Steady but Cautious Growth Returns

Wednesday

As Silicon Valley undergoes a resurgence, companies like Google, Yahoo and Apple are again looking for space to grow.

REDWOOD CITY, Calif. — A glittery blue office tower in downtown San Jose may well be the perfect symbol for Silicon Valley’s resurgence.

Finished in late 2001, after the technology sector imploded, the building, which cost about $100 million to build, never could find a tenant for its 17 floors. Deals to lure technology companies crumbled. A plan to move San Jose’s city hall to the site didn’t pan out. And as recently as November, the graphics chip maker Nvidia backed out of a deal to move in.

It started to look as if the Sobrato Development Companies, the tower’s owner, might never find a tenant. But that all changed in February. BEA Systems, a San Jose-based software company that had scrapped plans for building its own campus, bought the tower for $135 million. It expects to move in the first half of next year after it has built out the interior of the glass shell at a cost estimated by Sobrato at $20 million to $25 million.

“It was a smarter way to grow,” said Diana Wong, a spokeswoman for BEA Systems.

BEA is not the only company investing in real estate in Silicon Valley, an area extending south from just below San Francisco to San Jose.

In the last year, Google, Yahoo and Apple have together invested more than $400 million in large blocks of land or buildings where they hope to erect future campuses. Companies like Cisco Systems, which scuttled ambitious plans to erect a 6.6-million-square-foot campus when the area’s economy soured, are signing leases for vast amounts of space, some for the first time since the tech bubble burst, as they add employees.

The office vacancy rate across the valley stood at 10.1 percent as of March 31, the lowest rate since 2000, according to NAI BT Commercial, a real estate firm.

Silicon Valley’s economy, notorious for its booms and busts as it rode each new wave of technology, is on the upswing again. Led by a variety of industries, including clean energy, biotechnology and new media, the regional economy, this time more sober than speculative, is adding jobs. Last year, the number of new jobs rose by 23,000, the most since 2001, according to the Center for Continuing Study of the California Economy.

“I really like the valley now because they’re more fundamentally focused on making money than hype,” said William D. Watkins, chief executive of Seagate Technology, a disk maker in Scotts Valley, Calif.

Although the economy has improved, it is not back to the level of seven years ago. Around 200,000 jobs, or 20 percent, were eliminated in the valley during the bust, according to the Center for Continuing Study of the California Economy. Only 50,000 jobs have returned, and most of those have been created in the last two years.

“You can see it on the streets and in the restaurants — there’s no question things are up,” said Stephen Levy, the center’s director. “But it’s not 2000.”

Still, there is no doubt that there is a renewed sense of excitement. Companies are hiring again, restaurants are filling up, and traffic, long considered the bellwether for the local economy, is worsening.

Condominium towers are planned or under construction in downtown San Jose; a Four Seasons hotel opened last year in East Palo Alto, an area once known for high crime; and cities like Cupertino are flush again with tax revenue.

It’s a drastic change from 2000, when the tech bubble popped and forced companies to scale back or go under. Thousands of square feet of office space went back on the market, rents dropped and construction dried up. Within a year, the vacancy rate nearly quadrupled, to 12.9 percent, in Silicon Valley, according to NAI BT. It hit a high of 17.5 percent four years ago.

“Everything looked good; we built all these buildings and then nobody moved in,” said Drew Arvay, a managing partner at NAI BT in San Jose.

Now, however, real estate investors are once again buying, pointing to strong job growth, a lower vacancy rate and higher rents as reasons for their moves. (Rent averages $2.46 a square foot a month in the valley, though it can rise as high as $5.80 in places.)

One investor, Rreef, Deutsche Bank’s property fund manager, made local headlines last year when it paid $1.1 billion for 5.3 million square feet of office space in different areas of the region. The deal, real estate brokers say, was one of the largest in the valley’s history.

“We think long term that Silicon Valley will be a significant generator of jobs, and that’s what we want to see when we invest,” said James N. Carbone, a partner at Rreef’s San Francisco office. The purchase increased Rreef’s portfolio by more than 50 percent.

After sitting on the sidelines for the last few years, developers are starting to build without signed tenants.

The Jay Paul Company, a private real estate firm in San Francisco, sold half of its portfolio in the last two years so it could buy land and buildings. It used some of that money to start construction on the largest speculative office complex in the valley since the dot-com collapse, Moffett Towers. When complete, Moffett Towers in Sunnyvale will have three eight-story office buildings and four seven-story buildings, totaling 1.8 million square feet. The first two buildings will be ready early next year, and although Jay Paul does not yet have any tenants, that doesn’t faze the company.

“So many companies got burnt with pre-leases, no one wants to hear about them now,” said Matt Lituchy, chief investment officer at Jay Paul. At the turn of the century, many companies signed leases in anticipation of growth. But when the dot-com boom ended, the tenants were stuck with space they no longer needed.

Now, however, Mr. Lituchy said, “company boards say to their executives, ‘Tell us when people are sitting on top of each other, and then we’ll talk,’ ”

Jay Paul’s gamble is likely to pay off, real estate brokers say, because there are not many large blocks of ultramodern Class A office space available, and there is fierce competition for what exists. It is one reason that Yahoo and Apple have bought significant tracts of land in the last year and have yet to begin construction. In the last two years, Sobrato, which owns nine million square feet of office and research and development space, leased all of its Class A office space, said John Michael Sobrato, a managing partner.

Nevertheless, persistent problems of transportation, affordable housing, education and difficulty in finding employees could harm the valley’s long-term growth if they are not addressed.

The Silicon Valley Leadership Group, a collection of 210 companies, has been trying to help fix some of those problems through a $32 million private housing trust, a fellowship program for teachers and a lobbying effort for light rail. This year, the organization introduced a program with Intel to provide more advanced training for middle school math teachers to help improve test scores.

“Ultimately, if we don’t solve these problems, the next waves of technology will be compromised,” said William Coleman, the group’s former chairman as well as chief executive of the Cassatt Corporation, a San Jose software maker. “If you transfer your competitive advantage somewhere else, you can’t ever get it back.”

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